AFR: Jet Fuel Shortage Gives Air To Supply Woes

A shortage of jet fuel that arose at Melbourne airport this week – even if likely to be short-lived – has exposed the frailty of Australia’s fuel supply chain. It has also played into the hands of those who argue that the spate of closures of local refineries is putting security of energy supply in Australia at risk, a view firmly rejected by the supply industry.

Image originally published on the AFR website

As the problem was local to Melbourne, which still has its full complement of two working refineries, blaming it on refinery shutdowns alone is misleading.

But that a shortage could arise at all – due to a delayed cargo – has heightened doubt about Australia’s ability to withstand supply shocks.

At a broader level it may call into question the government’s flouting of International Energy Agency requirements that member countries hold 90 days’ worth of imports in reserve in case of supply disruptions.

Leaving that larger question aside, the impact of this week’s blip appears limited to customers of Caltex Australia, which put the problem down to a jet fuel shipment delayed by a few days and due to arrive on Friday.

But that a temporary hitch involving a relatively minor player in the market led to the embarrassing rationing of fuel to international airlines with almost no notice clearly points to a problem.

The Board of Airline Representatives of Australia (BARA) seized on the incident to highlight what it sees as a long-standing issue around an outdated supply system for jet fuel, not just at Melbourne airport but across the country.

BARA executive director Barry Abrams says the “archaic” system prevents the entry of new players such as World Fuel Services into the aviation fuel supply market, which is locked up by existing players: Shell, ExxonMobil, BP and Caltex.

A PRODUCT OF HISTORY

Both the regulatory system and the infrastructure are “a product of history”, being designed at a time Australia was an exporter of jet fuel, Abrams says. They haven’t evolved with the market, which has been transformed by the refinery shutdowns and rising demand, which has put more pressure on imports.

Airlines, for whom jet fuel is the biggest cost, point to the need for major investment in fuel infrastructure at Melbourne airport, including storage, truck unloading facilities and pipeline capacity.

BARA is pushing for reforms that would allow importers of jet fuel to compete “on merit” at major airports. It wants open and competitively priced storage sites both in the airport and off-site, open access to jet fuel pipelines and the opportunity for new players to build independently owned pipelines where necessary.

With member airlines spending more than $4 billion a year on more than 4 billion litres of jet fuel, there’s plenty to play for. But oil companies look unlikely to yield easily.

For Caltex, jet fuel has been a stand-out performer, with sales in the first half of 2014 jumping more than 11 per cent and helping offset declines in petrol. Shell kept hold of its aviation fuel business when it offloaded the rest of its downstream business to trader Vitol for $2.9 billion last year.

Australia’s tally of refineries has dropped from seven a decade ago to five and will decline to four when BP closes its Brisbane plant later this year, another casualty of competition from mega-refineries scattered across Asia.

Caltex boss Julian Segal has argued that relying more on imported fuels actually increases Australia’s security of supply because shipments come from Asia while oil is sourced from as far afield as West Africa. But this week’s events show the fuel supply chain can be fragile.

The government is aware of the problem, noting in the Energy Green Paper in September the need to “monitor” the combined impact of rising demand for fuel and the shrinking refinery sector.